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GAO Bank PCA rules fail to protect insurance fund

WASHINGTON (6/27/11)--Current bank prompt corrective action (PCA) rules, which were largely untested before 2007, result in a too-little-too-late supervisory approach, according to a recent Government Accountability Office (GAO) study that was required under the Dodd-Frank Wall Street Reform Act. Under PCA rules for banks, as it is with credit unions, as an institution’s capital level deteriorates, its CAMEL rating goes up. When that happens, regulators are required to increase supervision and take actions meant to force management to make improvements. If those improvements do not materialize, the regulator is required to close the bank before losses to the Deposit Insurance Fund (DIF) can multiply. The banks’ DIF is funded with taxpayers’ dollars, while the National Credit Union Share Insurance Fund is supported solely by the credit union system. However, the mechanics of the PCA rules are substantially similar. The report noted that as a result of bank failures, the DIF balance fluctuated from roughly $51 billion in early 2007, to approximately negative $21 billion in late 2009, and stood at negative $7.4 billion as of the end of 2010. A key finding of the GAO report is that, since the country’s financial meltdown in 2008, PCA actions at banks not only grew tenfold, but for those that ultimately failed PCA did little to decrease losses to the DIF compared to failures that did not go through a PCA routine. The GAO report indicated the fault largely fell with having capital levels serve as the main trigger for PCA actions: “(P)roblems with the bank's assets, earnings, or management typically manifest before these problems affect bank capital. Once a bank falls below PCA's capital standards, a bank may not be able to recover regardless of the regulatory action imposed.” All four federal banking regulators—the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve, and the Federal Deposit Insurance Corporation—stated that “PCA was not designed for the type of precipitous economic decline that occurred in 2007 and 2008,” according to the report. The GAO made several recommendations for the federal banking regulators to consider, including “adding a measure of risk to the capital category thresholds and increasing the capital ratios that place banks into PCA capital categories.”